The home-buying process has many details and can be frustrating for some people. This is especially the case with the ongoing wave of high prices. For many people, paying a high price for a house is not an available option because they are already struggling financially and need to save as much money as possible. Fortunately, there are multiple options for affordable housing. One of these options includes buying a home in foreclosure.
Your Guide to Foreclosed Properties
Although foreclosed homes can be an excellent option for saving money, not everyone is familiar with this type of property. For this reason, we made this article that explains:
- What Does Foreclosure on Houses Mean?
- How Does Buying a Foreclosed Property Help Save Money?
- Negative Aspects of Purchasing a Foreclosed Home
- Where Can You Look for a Foreclosed Home?
- Different Types of Foreclosed Properties Listings
What Does Foreclosure on Houses Mean?
To better understand what it means when a house goes into foreclosure, take this example: Let’s say you choose to take out a loan to buy a house. In this case, you are a borrower. Your lender can be a bank, a mortgage company, or even a governmental entity. Everything will be fine if you pay off your mortgages smoothly and on time.
However, if you default on your mortgage, this is where the problems start. Typically, that will result in transferring the ownership of the property from you to your lender. In other words, you will no longer be the owner of the house–instead, your lender will have the right to sell it to recover their losses. This process is called foreclosure.
How Does Buying a Foreclosed Property Help Save Money?
When a house goes through foreclosure, that means that the lender needs to get their money back as soon as possible. For this reason, they will try to encourage a quick sale by holding auctions or reducing the price of foreclosed properties. In fact, you can buy a house at a much cheaper price compared to the other houses on the market if it is in foreclosure. The cheaper price is the primary factor that attracts potential buyers to foreclosed homes.
Taking the property away from the current owners and selling it “as is” will result in a great price drop, making the home more affordable and appealing to purchasers. Moreover, there is a chance of further savings thanks to the low costs that come with this type of property. By lower costs, we mean lower down payments, interest rates, and so on.
Negative Aspects of Purchasing a Foreclosed Home
Because nothing is perfect, foreclosed homes cannot have all of these advantages without also having some issues that come with them. However, it’s up to you to decide if the benefits are worth choosing this option in spite of the drawbacks, or vice versa. In all cases, you should be aware of the following disadvantages:
- Issues with the Property
- Long Time to Complete the Purchase
- Competitive Markets
- Unexpected Expenses
Issues with the Property
Most of the time, families who can’t pay their mortgages also don’t have enough money to keep their homes in good shape. Furthermore, they might even neglect maintenance on purpose before the bank acquires the property. This is why buying a home that is in foreclosure means you will most likely have to spend a lot of money on repairs.
Long Time to Complete the Purchase
When seeking to buy a home in foreclosure, you may face a number of different challenges. One of these challenges is the long processing of paperwork. Another is the time it takes to get a loan if your property’s appraisal value is low. The more damage the property has, the lower its appraisal value is. This can be a common pain point for foreclosures!
If you don’t move fast, someone else might get it before you. Generally, the cheaper the price, the more people will be interested in the item, especially if it’s a property. Because of this, competition can heat up. There may be multiple offers on a home if it is in high demand. This may result in overpricing the property eventually if a bidding war drags on for too long. Even if another bidder offers a higher price for the home you like, you shouldn’t lose hope. Actually, it is not unusual for foreclosure transactions to fall through. So, remember to keep checking back.
Never judge a book by its cover, because a foreclosure may seem amazing on the outside but hide unpleasant surprises on the inside. As a matter of fact, the house’s price is not the only money you usually pay going through the purchasing process. You should be aware of the other expenses that may include liens or unpaid taxes, for example. To avoid paying more than what you expected, you should get a clear understanding of all the expenses that come with the property.
Where Can You Look for a Foreclosed Home?
If you are wondering where you can find listings for homes in foreclosure, Google it! The web is your best bet when looking for this type of property. When you start searching for foreclosed homes online, you might come across multiple listing service (MLS) websites. These websites are an excellent source of listings.
When it comes to real estate, some people prefer working with a professional rather than doing all the work themselves. If you are one of those, it would be a good idea to seek assistance from a local real estate agent. They are generally aware of the foreclosed properties that are up for sale. Moreover, they can help you with the home-buying process and give you the best advice.
Different Types of Foreclosed Properties Listings
Usually, you can get a foreclosed property in one of the following forms:
- Pre-Foreclosure Properties
- HUD Homes
- Short Sales
- Auction Homes
- Directly Purchased by the Bank
Pre-foreclosure properties can be a good catch for homebuyers because their owners want to sell them and pay off their debt as soon as possible. Usually, before a house goes into foreclosure, the lender files a notice of default. At this point, the borrower gets a letter notifying them that the foreclosure process will begin soon. This is what is known as the “pre-foreclosure phase,” which comes before the home is put up for auction.
Have you heard that the U.S. Department of Housing and Urban Development (HUD) is selling homes? In fact, when a home is purchased with a federally guaranteed loan (like an FHA loan), the government takes control of the property rather than the lender. However, you can’t complete the homebuying process yourself. You will need to work with a HUD-approved broker to make an offer on your behalf. Therefore, if that’s something you might be interested in, talk to one of those brokers. There is a website called the HUD Home Store that features these properties. Brokers are ones that can place bids on this site for a property that a potential buyer is interested in!
When looking for homes in foreclosure, you might come across “pending bank approval” listings. These are properties available as a result of short sales. Although short sales are common, some people don’t know how they work. A short sale takes place when the buyer and seller come to an agreement on a price that is less than the outstanding mortgage balance. That doesn’t necessarily mean that the borrower has to already be in default. But, in order for a short sale to go through, the borrower has to prove with documents that they are experiencing financial hardship. Loss of income or inability to secure gainful employment are examples of the proof a borrower can provide.
You will notice that a short sale process may take longer than the typical home buying process. Also, the terminology used in a short sale contract may be different from the regular contracts. Other than that, the process is similar to the typical one.
If the borrower still hasn’t paid their mortgage in full after being given notice, the sheriff will hold a public auction. These types of auctions might happen in a variety of places. It is common practice to hold such auctions in front of a government building. The auction will also be promoted by signs placed across the city. Since the borrower has defaulted on their loan, the profits from this auction will go to the lender.
Directly Purchased by the Bank
Instead of going through the hustle and bustle of auctions, you can simply go for a real estate-owned (REO) property. A REO property is a property that a bank owns and sells. Basically, this property was initially offered at an auction but wasn’t sold. In this case, it becomes the bank’s property. This means that you can purchase the house directly from the bank.
Buying a house is typically costly. However, if you want to save money, you may consider purchasing a house in foreclosure. But you have to be aware that you will buy it as-is. This means that you may need to pay for repairs and other expenses. If you want to buy one of these properties, you can ask a real estate broker for help or search online. There are multiple types of listings out there, so make sure to understand each one of them to make the best decision.